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Friday, 18 September 2015

Transcripts...Agco talks

After reviewing a transcript from Alibaba (link here) earlier, now's the turn of the agricultural equipment company Agco. My last write-up of the stock back in late July (link here) concluded that:

'Running all this through, I still see the company on little more than a x10 EV/ebit valuation and generating nicely in excess of a 5% free cash flow yield. Agriculture remains a positive mega theme for me over time. In essence I still see value in Agco deeper into the US$50s'

That was a good call...for a couple of weeks into August but since then (assisted by some poor Deere guidance - link here) the share has fallen back...

...making the company's appearance at a Morgan Stanley conference well-timed. Reviewing the transcript what can we conclude? Here are my most insightful extracts from the transcript (any additional specific underlining and related are my own):

On current North American demand conditions -

Certainly what we're seeing in North America is farmers are
hesitant to buy equipment this year as you can see what's happening with our
overall retail demand of mainly large horsepower tractors going down.

They just want to take a pause at this point as they
reassess their profitability levels and really enjoy the productivity of the
equipment that they have right now.

On inventories -

I think certainly it is a challenge for everyone in the
industry inventory levels at our dealers in North America are higher than where
we'd like them to be.

new and used are coming down proportionally. Unfortunately
we still need to get both of them down further

Brazil -

I would agree with you that the reason the market is down so
severely is I think more about what's happening in Brazil from an economic
standpoint

There is more hours put on a unit in Brazil then what we
would see typically in the U.S. in the sugarcane sector that those equipments
are, the equipments used on 24-hour, seven days a week basis. And so they
really do run them down much faster than what we would see. So the normal
replacement cycles going to be faster in Brazil. What that tells us about 2016
or 2017 is hard to say

Operational leverage -

if we could get our revenues back up and our production
levels back up we’re going to see a natural improvement in our margins
depending on where that is there are internal actions that we’re taking to try
and improve the margins that we think will move us up in the future

Balance sheet -

We have been aggressively buying back stock and our forecast
for 2015 and 2016 is we have a $500 million share buyback authorization we
think that, that will be done during that period of time and it will equate to
how much cash flow we think we have the capability generating during that
period of time. So it shouldn’t materially affect our leverage and that’s kind
of our view point at this point is that a lot of a free cash flow should go to
returning cash to shareholders at this point in time.

Pulling all this together it is clear that conditions are not easy for Agco from a demand/inventory perspective (I note Deere on the latter point was a little more bullish - possibly an individual stock differentiation). The comments on Brazil were pretty much as expected (Deere in particular cited the country as having issues - again of a more general economic nature). Better news however on the balance sheet - as I noted in my late July linked article this is one of the real positives of the stock (along with pricing, valuation after taking everything into account etc.)

So overall...not the best tone (maybe explaining some of the shorter-term share price move) but capability still remains as noted by the cash flow comment (and reality of a 5%+ free cash flow yield) so I am retaining the stock and taking a further sentiment sounding from the official release of the next set of numbers during the third quarter earnings season in about six weeks time. HOLD in the meantime.